Filing Bankruptcy and Auto Accidents

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September 28, 2012
Edward Smith

People purchase auto insurance both because the law requires it and because they don’t want to lose their life savings if they’re at fault in an accident, the other driver is seriously injured and the jury rules against them for a sum in excess of their policy limits.

The best way to protect oneself, of course, is to purchase a policy with high liability limits. The minimum any driver with an income over $50,000 yearly should purchase is $100,000/$300,000. If you earn over $100,000 yearly, at least a $300,000/$500,000 policy should be purchased. If you can afford an umbrella policy, that will provide excess protection to you at a modest annual premium. (Make sure your auto policy and umbrella policies have uninsured limits equal to your liability limits — that will protect you up to the amount of your policy if YOU are injured).

So let’s say you’ve been smart and responsible. You’ve purchased an adequate policy with even a strong umbrella and you’re in a very serious accident. The other party has had a severe injury resulting therefrom and may never work again. You’d fully expect the insurance you’ve paid your premiums on to pay a fair settlement and get you out of the lawsuit, wouldn’t you?

Often, in the world of auto insurers, no good deed goes unpunished. In a recent case in my office, my client was involved in a serious accident, yet the other driver had only a $50,000 policy with his insurer. Once we found out the policy limits and our client had surgery, we offered to settle for that limit. Instead, the other insurer adamantly insisted despite all evidence that my client’s surgery was unrelated to the accident (though symptoms arose and increased from the day of the accident until the surgery) and instead offered only $16,000 to settle this case with a realistic value before a jury of over $500,000.

We took the case to an arbitration where the arbitrator awarded us a sum in excess of the defendants policy limits. In an attempt to resolve the case, our client again offered to take the $50,000 limits of the other side. Amazingly, again, the insurance company for the at-fault driver refused to settle. In California, either side can reject the arbitration award and the defendant’s insurer did so.

The next step was involved and we prepared our client’s case to go to a jury. We hired experts and were prepared to start trial when a new trial attorney substituted in at the last minute when they realized we were really going to try the case. The new attorney quickly realized that the case was worth far more than the $50,000 policy and persuaded his insurance company to offer to pay the full policy.

By this time, however, we had spent money to retain experts and had no choice but to decline the offer and go onwards to trial which was to start 10 days hence. Two days before the trial was to start, the insured driver, seeing we would no longer accept the policy limits of $50,000 declared bankruptcy, putting a stop to our lawsuit but damaging his credit for years to come.

His insurance company, which he hired to protect him, had screwed him over. Sadly, he was likely unsophisticated, and had no real need to do this. If my office had proceeded through trial and obtained a verdict of $500,000 or so, we would have contacted him and told him we were as shocked and outraged at having to take a verdict against him because his insurer had not done the right thing and settled early on the case against him.

We would have requested he give to our client an “assignment of rights” which means he would give to our client the rights he had against his own insurance for “bad faith” failure to protect his interests and also the rights he had because he experienced great emotional distress because he had to go through this stressful trial with financial disaster hanging over his head. In return, we would give him a “covenant not to execute” which means we would promise not to go after any of his personal assets to satisfy the judgment against him. He would still maintain his own rights to sue his own company on his own behalf and we would likely represent him in this as well.

The bottom line in this is that bankruptcy was not necessary at all. He should have went through the trial and if he suffered an adverse judgment, turned around and sued his own insurance. Juries typically are not kind to insurance companies that act in this uncaring manner but these situations happen all the time.

I don’t know for sure who encouraged this defendant to declare bankruptcy on the eve of trial. If I was a betting man, I’d wager the attorney for the insurance company who was hired to defend him whispered this option in his ear, thereby sparing himself a losing trial and protecting the insurance company hiring him from having a huge verdict entered against them.

The moral of the story is this. If your inurance company risks your assets by making you go to trial when they had the opportunity to settle the case against you for policy limits, Do Not File Bankruptcy. Hire an experienced attorney to contact the injured parties’ lawyer so that he can protect your interests by an assignment of rights and covenant not to execute..